Buffett's most revealing article appeared in the Nov. 10, 2003, Fortune, titled "America's Growing Trade Deficit Is Selling The Nation Out From Under Us." It began with a "wildly fanciful trip" to two islands, Squanderville and Thriftville, which were both "self-sufficient" until they foolishly started to trade. Then Squanderville began to run trade deficits, which gave Thriftville the Squanderbucks to invest in Squanderville assets.
The United States was Thriftville until 1980, says Buffett. "Since then, however, it's been all downhill." But remember what the economy was like in that supposedly wonderful decade before 1980 before you buy into this fable too quickly. And realize that the best long-term example of Thriftville is Japan -- a country that has lost jobs and stock market wealth for a dozen years.
Buffett is strangely troubled by the fact that the value of foreign-owned assets in the United States exceeds by $2.5 trillion the value of U.S.-owned assets abroad. But whose assets would he rather have -- theirs or ours? He boasts of speculating in foreign currencies, but that isn't investing. Besides, the dollar rose 3 percent last month.
U.S. assets -- stocks, bonds and real estate -- have risen spectacularly since 1982, the same period when Buffet thinks everything went downhill. Meanwhile, many foreign assets -- such as Japanese stocks and Third World loans -- have fallen in value, some to zero. Some valuable foreign-owned assets include foreign drug companies and auto factories all over the United States. If those U.S. plants employ too many people and become too profitable, then Buffett fears they may end up "paying ever-increasing dividends" to stockholders in companies like Nissan or Bayer. So what? Many Americans own stock in companies like that.
Clyde Prestowitz once wrote a book called "Trading Places: How We Are Trading Our Future With Japan" (I have seen used copies on Amazon for one cent). Does Buffett really want the United States to trade places with Japan (Thriftville)? If so, why doesn't Berkshire invest in Japanese stocks?
Buffet shifts from his childish fable to advocating "a tariff called by another name." This draconian scheme is not a tariff, actually, but a very extreme import quota. It would be illegal to ever again import one dollar more than we exported. Buffet views this a "tax on consumers," but more than half of our merchandise imports consist of products essential to U.S. producers -- electronic components for U.S.-made computers and scientific equipment; parts for U.S.-made cars; chemicals for textiles and drugs; basic industrial materials such as oil and metals, and so on.
If such inputs could be purchased at all under Buffett's plan, their costs would be so much higher than in other countries that the United States could not afford to export anything at world prices. That would require even tighter restrictions on imports. Developing countries hoping to sell to the United States to get the dollars to repay their debts would default and stop trading. With world markets imploding, goods would have to be liquidated far below cost, causing widespread failures of businesses, farms and banks. Buffett does not think his plan should be compared to the Smoot-Hawley tariff of 1930. He's right -- it's worse.
Buffett's last report to his shareholders cautioned that, "Our country's dynamism and resiliency have repeatedly made fools of naysayers." The trouble with politicians using naysayers like Buffett as economic advisers is that such people cannot resist peddling gloom to voters who can read the headlines and see for themselves that it's utter nonsense. As Arnold Schwarzenegger learned, however, it is not so easy to muzzle an outspoken and charming curmudgeon who's worth billions.
If Kerry is really looking for sound economic guidance, it would be best to ask a real economist. One of the best, and a self-described Clinton Democrat, is Robert Hall of Stanford. But Kerry might not grasp his enlightened Harvard-bred views on tax policy. Bob Hall, you see, is the co-author of the Hall-Rabushka flat tax.